[NRC Tax Research Journal Volume 3X2 | Tax Treatment of Certain 4 REAL PROPERTY TRANSACTI Under the National Internal ‘This provides a brief information on the tax treatment of certain real property transactions for purposes of facilitating their registration with the Register of Deeds and the Assessor's Office of local government units. A. TAX TREATMENT IN GENERAL A final tax of six percent (6%) based on the gross selling price or current fair market value (zonal value) as determined by the Commissioner of Internal Revenue (CIR), whichever is higher, is imposed upon capital gains presumed to have been realized from the sale, exchange ot other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts, and corporations pursuant to Sections 24(D)(1) and 27 (D)(5) of the NIRC. If the property is classified as ordinary asset, the income from such sale is subject, to ordinary income tax. If the property is a residential lot, or a residential house and lot, and the selling price thereof is P1,500,000 or more, P2,500,000 or more, respectively, the same is subject to the 12% value added tax (VAT). Otherwise the 3% tax on gross receipts shall apply. (On the other hand, donation of a real property is subject to a donor’s tax at rates ranging from 2% to 15% of the net gifts made during the calendar year in favor of a donee who is not a stranger to the donor.’ If the donee is a stranger,” the donor's tax * Prepared by Mr. Donaldo M. Boo, Supervising Tax Specialist, reviewed and approved by Deputy Director Dante V. Sy, OIC, Direct Taxes Branch, NTRC. Section 99(A), NIRC. 2 Section 99 of the NIRC identifies a “stranger” as a person who is not a: (1) brother, sister (whether by whole ‘oF half-blood) spouse, ancestor and lineal descendant; or (2) relative by consanguinity in the collateral line ‘within the fourth degree of relationship. GB Tax Treatment of Certain Real Property Transactions Under the NIRC of 1997][NRC Tax Research foumal Volume XiX2 ] is 30%.) However, if the net gift is not over P100,000.00, the same is exempt from the donor's tax, Donation mortis causa or those which are to take effect upon death of the donor and therefore partake of the nature of testamentary disposition, are not subject to a ‘donor's tax but to an estate tax. ‘The estate tax is levied, assessed and collected upon the transfer of the net estate of every decedent, whether resident or nonresident of the Philippines, at rates ranging from 5% to 20%.’ If the net estate is not over P200,000.00, the same is exempt from the estate tax. Section 196 of the NIRC likewise provides that on all conveyances, deeds, instruments or writings whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any person or persons designated by such purchaser or purchasers, a documentary stamp tax at the rate of fifteen pesos (P15.00) per one thousand pesos (P1,000.00) of the amount of consideration or on the zonal value of the said real property shall be collected. B, TAXATION OF SPECIFIC REAL PROPERTY TRANSACTIONS® Sale/Transfer of Principal Residence. ~ May be exempt from the CGT. ‘The exemption of the sale or disposition of principal residence from the COT depends upon the seller/taxpayer. If the seller/taxpayer does not claim exemption, the transaction is subject to the payment of CGT and DST. The buycr, absent any stipulation to the contrary, shall deduct and withhold from the agreed selling price the CGT and shall remit the same to the BIR using CGT Return (BIR Form No. 1706) within thirty (30) days from the date of sale of the subject principal residence. If the seller/taxpayer claims for a CGT exemption, the following conditions must be met:* a. That the proceeds of the sale shall be utilized in acquiring or constructing a new principal residence within 18 months from the date of sale or disposition; b. That the Commissioner of Internal Revenue (CIR) shall be notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and > Section 99 (B), Ibid. “Section 84, Thi. > Unless otherwise specified, the properties involved are presumed to be a capital asset © Per See, 24 (D) (2), NIRC. ax Treammant of Cara Real Property Wasactons Under the MIRC of 197 7]NIRC Tax Research Journal Varume XIX | ¢. That the exemption can only be availed of once every 10 years. ‘The Buyer/Transferee shall withhold from the seller and deduct from the agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or manager's check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow’ Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof have, in fact, been utilized in the acquisition or construction of the Seller/Transferor’s new principal residence within eighteen (18) calendar months from the date of the said sale or disposition. ‘The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property. After depositing the amount representing the six percent (6%) capital gains tax as mentioned above, the Buyer/Transferee and the Seller, shall jointly file, within thirty (30) days from the date of the sale or disposition of the principal residence, with the Revenue District Office having jurisdiction over the property, in duplicate, the Final Capital Gains Tax Return (BIR Form No. 1706, or any form number assigned by the BIR), covering the property bought with no computed tax due stating that the supposed-tax due/amount so withheld by the buyer is maintained in a escrow account, which amount will be used to satisfy future tax liability, if any, on the subject transaction. For purposes of the capital gains tax otherwise due on the sale, ‘exchange or disposition of the said Principal Residence, the execution of the Escrow ‘Agreement shall be considered sufficient. The tax retum filed shall bear the addresses of both the seller and the buyer. If within thirty (30) days after the lapse of the aforesaid 18-month period, the Seller/Transferor fails to submit a documentary evidence showing that he/she has utilized the proceeds of sale or disposition of his/her old principal residence to acquire/construct his/her new principal residence, he/she shall be treated as deficient in the payment of his/her capital gains tax on the sale or disposition of his/her aforesaid Principal Residence, and be accordingly assessed for deficiency capital gains tax, inclusive of penalties and the 20% interest per annum computed from the 31° day after the date of sale/disposition of the said principal residence, pursuant to the provisions of Section 228 of the Code, as implemented by Revenue Regulations No. 12-99. In the issuance of assessments, the Seller shall receive all the required notices following existing procedures. Upon the time that the said deficiency tax assessment hhas become final and executory, the deposit in escrow, inclusive of its interest earnings, shall be forfeited and applied against the deficiency capital gains tax liability. If it is insufficient to cover the entire amount assessed, the Seller/Transferor shall remain liable for the remaining balance of the assessment. On the other hand, 7 "The term “Escrow” means a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promise or oblige. 7 a Treatment of Cerain Real Property Transactions Under the NIRC of 1997|